Power IPOs: Stretching it too far - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Power IPOs: Stretching it too far

Dec 7, 2009

India needs a lot of power over the next few years. There are no two ways about it. That the country can face a tough future if nothing is done on the power front is a widely known fact. Something needs to be done urgently if we are to maintain our high GDP growth numbers over the next many years.

While the government and private sector realise this fact, things are still very slow on ground. This is justified by the fact that we still add less than 5,000 megawatts (MW) of new capacity every year. As compared to this, China adds around ten times this capacity annually!

Now while India continues to suffer a grave power deficit, we are seeing a spate of new players entering the fray. And the way they are doing this is by way of raising fresh capital from the stock markets. We have seen three large power sector IPOs since the start of this year. These have been from Adani Power (July), NHPC (August) and Indiabulls Power (October). Another company - JSW Energy - is launching its IPO today.

While there are several differences in the businesses of these companies, one thing remains common. High valuations at which their IPOs have been priced. This is when some of these like Adani Power and Indiabulls Power had no prior history of operating large power plants and therefore suffered from huge execution risks. While it is not to say that existing power players coming with their IPOs do not face such risks, but experience plays a big part in the success of a power venture.

Coming back to these new kids on the block, they face a number of issues in developing their power projects. Such issues range from regulatory and environmental approvals, land acquisitions, and fuel and equipment supplies. All these may result in cost overruns of projects thereby impacting future cash flows, in anticipation of which these IPOs have been priced high in the first place!

There is no denying that some of these companies might earn big bucks in the future as their projects come on stream. But would this mean big bucks for investors is highly doubtful. This is because these companies will require lots of capital over the next few years that will most likely stretch their balance sheets.

As such, a lot of money that will be generated through these power projects will ultimately go back to fund expansion of these projects. A little will come back to the investors either in terms of high return on equity or in terms of dividends.

Anyways, those who have applied to these power sector IPOs have already started on a weak base. This is given that they have picked up these stocks at high valuations, which is not the right way to go about investing in stocks.


Equitymaster requests your view! Post a comment on "Power IPOs: Stretching it too far". Click here!

  

More Views on News

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

Sundaram Bluechip Fund: Will Hold the Stable Horses (Outside View)

Sep 18, 2020

PersonalFn briefly outlines the newly launched NFO note HSBC Corporate Bond Fund.

Wait! Don't Chase Smallcaps Now (Profit Hunter)

Sep 18, 2020

Let the markets take a breather before you jump in.

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

A Contrarian View on Whether You Should Load Up on Small Caps podcast (Views On News)

Sep 17, 2020

Rahul Shah discusses whether the SEBI circular is the perfect time to start investing in good quality small caps

More Views on News

Most Popular

Will the IPOs in 2020 Be as Rewarding as the Ones in 2019

In 2017 funds raised through IPOs is highest over a decade. And the stock market still flying high, some observers are predic...

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Sep 18, 2020 (Close)

S&P BSE SENSEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS